Feds ante up another bailout

Rushing to rescue Citigroup, the government agreed to shoulder hundreds of billions of possible losses at the stricken bank and to plow a fresh $20 billion into the company.

Regulators hope the dramatic action will bolster badly shaken confidence in the once mighty banking giant as well as the nation’s financial system, a goal that so far has been elusive despite a flurry of government interventions to battle the worst global crisis since the 1930s.

The action, announced late Sunday by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already fragile financial system and the U.S. economy.

"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the three agencies said in a joint statement. "We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks."

Investors reacted cautiously. Most Asian stock markets retreated when they opened Monday, weighed down by worries about Citigroup. However, losses were pared after the government announcement.

The bold move is the latest in a string of high-profile government bailout efforts. The Fed in March provided financial backing to JPMorgan Chase’s buyout of ailing Bear Stearns. Six months later, the government was forced to take over mortgage giants Fannie Mae and Freddie Mac and throw a financial lifeline — which was recently rejiggered — to insurer American International Group.

Critics worry the actions could put billions of taxpayers’ dollars in jeopardy and encourage financial companies to take excessive risk on the belief that the government will bail them out of their messes.

The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief also participated.

Vikram S. Pandit, Citi’s chief executive officer, welcomed the action. "We appreciate the tremendous effort by the government to assure market stability," he said in a statement issued early Monday.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government also received an ownership stake.

As part of the plan, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

Under the loss-sharing arrangement, Citigroup Inc. will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent. Money from the $700 billion bailout and funds from the FDIC would cover the government’s portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

Importantly, the agreement calls on Citigroup to take steps to help distressed homeowners.

Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.

Under the IndyMac plan, struggling home borrowers pay interest rates of about three percent for five years. Rates are reduced so that borrowers aren’t paying more than 38 percent of their pretax income on housing.

The IndyMac plan also was used as a model for a new program by mortgage finance companies Fannie Mae and Freddie Mac and for two other failed thrifts taken over by the government on Friday. FDIC Chairman Sheila Bair has been pressing Treasury to use $24 billion from the $700 billion bailout program to put the mortgage modification program on national footing, but Paulson is opposed to that idea.

Citigroup has seen its shares lose 60 percent of their value in the past week, reflecting a crisis of confidence among skittish investors. They are worried all the risky debt on Citigroup’s balance sheet will turn into losses as the economy worsens and the markets stay turbulent — losses that could be nearly impossible to reverse.

Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail. The company has operations stretching around the globe in more than 100 countries.

Analysts consider Citigroup the most vulnerable among the major U.S. banks — especially after it failed to nab Wachovia Corp., which was bought instead by Wells Fargo & Co. That was a missed opportunity for Citi to gets its hands on much-needed U.S. deposits that would bolster its cash position.

Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up huge losses on the soured investments. The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs.


AP Business writers Marcy Gordon in Washington and Madlen Read in New York contributed to this report.


  1. adamrussell

    The bankers are the new kings of the earth. They own us. They come to us and say “You need to give us money, or else”, and we are forced to give. We are reduced to being serfs paying taxes to the banker-kings. What we should do is revolt against the kings and form our own banking system owned by the US government.

  2. griff

    JFK tried to return the currency back to the People. Look up “red seal US notes”. eBay has plenty for sale. Instead of “Federal Reserve Note” (loaned to our government by the Fed and interest-bearing), you will notice “United States Note” (non-interest-bearing currency). Real money. Look up executive order 1110.

    And people think he took a bullet in the head because of his anti-mob crusade. No, JFK actually thought he had presidential power. How wrong he was.

  3. griff

    More bailouts for the thieving banksters. More looting of the People to subsidize this legal plunder. More transfer of wealth to the corrupt elitist bankers so the CEO’s can be rewarded for their crimes.

    “I believe that banking institutions are more dangerous to our liberties than standing armies. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.” – Thomas Jefferson

  4. Janice

    Another rescue of thieves and crooks, fat cat bankers who don’t give a damn about We the People; who are going to foot the bill to save their sorry asses.

    They made bad decisions, let them reap what they have sown. I sure don’t see these financial carpetbaggers trying to help any home owners keep their homes by holding interest rates or giving any of the struggling customers any breaks on anything. Rather, they keep raising interest rates, late fees, and working their damnedest to wring every last penny from their marks (us) that they can.

    I would really like someone to esplain to me just why we have to keep taking it on the chin? We give them billions without any conditions, and they keep sticking it to us – makes perfect sence to me – we’ve all fallen down the rabbit hole and can’t seem to find our way out. I only foolishly hope that Obama will be able to straighten this mess out – but I believe that these I can’t think of a description that is despicable enough to adequately describe these financial demons things have all the power on our planet, because we allow it. Perhaps we are all the fools…

    If you tell the truth you don’t have to remember anything.
    Mark Twain

  5. Carl Nemo

    The old expression you can’t get blood out of a turnip is more true than ever as this financial debacle unfolds.

    Between public debt both incurred and projected along with hot money derivatives whipping about the planet on a daily basis the entire estimated debt load for the world, both public and private is one half “quadrillion” dollars; ie., 500 Trillion bucks. Each trillion is a 1000 billion and each billion is a 1000 million. So this will give folks an idea about the magnitude of this mind-boggling amount of truly astronomical debt.

    All debt is linked to compound interest relative to payback, the debt is totally unpayable and is “worthless” debt. No one, not even US taxpayers have made a dent in this debt nor will they ever be able to do so.

    Since our duly elected “crimpols” refuse to address the issue by balancing our budget, slashing all earmarks and making an effort to reduce the public debt the entire discussion of how bad things are or will get in the future is mute. To put it simply, it’s a bad joke on “them” not us.

    There’s an old expression to the effect; borrow a small amount of money and the banker owns the debtor, but borrow incredibly large amounts of money and the debtor owns the banker.

    So they can pitch funny money all day long at this crisis with the same end result; ie., a worldwide economic crash regardless of talking heads pitching out the latest mind-boggling bailout amounts. It’s reached “entertainment” proportions at this point in time.

    We only need to be concerned when we hear that our leaders are going to sell off large portions of the U.S. to China or to any other deep pockets creditors as payment for their foolishly incurred debt, all without our permission.

    Then it will be time for blood in the streets and in high places…! : |

    Carl Nemo **==

  6. Elmo

    Citibank my Citibank your 22% interest rate nearly drove me to bankruptcy. [It didn’t happen thanks to my local banker who helped me learn about managing credit and paying cash when you can and not buying stuff you don’t need when you can’t pay for it.] Now Oh Citibank my darling Citibank you come begging to the people you’ve been screwing all these years to give you their tax money and their grandchildren’s tax money for years to come so that you can stay in business and keep screwing people. Thank you dear Citibank and please may I have another.

  7. griff

    They raised my rate from 7.99% to 28.99% because I was one day late. I stopped paying them, and I told them exactly why. They call me everyday, including Sundays now, 10 to 12 times. My credit was sparkling before this, but I will not be robbed anymore.

    I had never missed a payment and always paid more than the minimum due, but that doesn’t matter to them. Then the fees kicked in and pushed me over the limit, which meant more fees, and the cycle continues.

    I refuse to take their calls after explaining to them what they need to do, which is return my rate back to 7.99%. They refuse, so I won’t deal with them. Last time I spoke with them, I encouraged them to look to Congress if they wish to get paid, since everyone else is. It appears they’ve taken my advice.

    Since then, my other two cards have followed suit, and I’ve stopped paying them as well. Now I have three banks (Chase and BoA) calling me all day and night. Thank the gods for callerID and cell phones.